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Three weeks into 2020 and things continue apace. The world has been to the brink of war and back (remember that?), the impeachment trial is finally underway, and now there’s fears of a new global pandemic. Meanwhile, markets are up over 2% on the month, which annualizes to another 30% year. Which is absurd, so don’t get your hopes up. As for the “why”, well it’s certainly not due to fundamentals. Global trade (as measured by the Baltic Dry Index) is at a 9-month low and falling, and the IMF has cut their global growth forecast to 2.9%, which is the lowest since the financial crisis...and those forecasts tend to be optimistic. But thankfully the Fed shows no signs of slowing their repo operations, so the market has the green light to keep going higher. The Fed even - get this - floated the idea of lending directly to hedge funds during the next liquidity crisis. 
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It’s beach renourishment time again! The dredges and pipes and bulldozers are all hard at work this offseason fighting with mother nature to try and keep those free-spirited sand grains in one place. Or at least temporarily reset them, I suppose. The more cynical among us might argue that it’s a bit of a losing battle...but man does that new beach look good.
From time to time, it’s a good idea to give your portfolio a little renourishment as well. We’re not talking about selling everything and starting over - after all, you don’t scrape the beach away down to bedrock and then rebuild it. You just need to move some things around a little bit. There are all kinds of pithy sayings out there about how to renourish your portfolio: “cut your losers and let your winners run”, “if you liked it before, you should like it even more now that it’s cheaper”, etc. Gag. All you really need to do is a simple rebalance. Happy Holidays, dear readers! Believe it or not, the vast majority of the newsletters we write are not, in fact, for our own entertainment. A couple of them definitely are - notably the April Tin Foil Hat series and the October Halloween series - but apart from those semiannual gems, most of the time we are trying to educate, inform, amuse, explain, entertain, and/or deobfuscate.
This one, however, will likely turn out to be none of that. If you’ve been paying attention to those trade confirmations that hit your inbox at the stroke of midnight, you’ll have noticed that we’ve been busy headed into year-end. The following is a glimpse into what we’re thinking, and why. Fair warning, it may feel a bit like climbing up an Escher staircase. But like we said, this one’s for us. Hindsight is 20/20, as they say. Unfortunately, since my benevolent overlords editors here at Beachcomber have these things called “deadlines”, there is absolutely zero hindsight available for this first Rogue Waves of 2020, as it is, in fact, still 2019 as I write this. Which must mean it’s Magic 8-Ball time!
What’s that? You think we meant to say “crystal ball”? Ah, yes, that is to be expected given all the punny ways you can put “vision” and “2020” together for economic forecasting. But from time to time we like to refrain from beating a dead horse. And also, economic forecasts are useless. ‘Tis the season for reflection and giving thanks, so here are three things in the investment world we are thankful for:
In the midst of our holiday travel this past weekend, we happened to tune in to some financial talk radio station, and this commercial came on - an ad for something that provided outsourced small business accounting. It was a pretty classic ad format that tries to induce a fear response:
Sound familiar? Well, this one went on to add “whatever you do, don’t try to do it yourself.” In response, and in the spirit of Thanksgiving, let us be the first to say: get stuffed, radio commercial man. Of course you can do it yourself. In fact, we’re willing to make a blanket statement that if something is being advertised - especially on the radio - you either don’t need it or absolutely can do it yourself. Fare thee well, 2019! It’s that time of year when we’re inclined to look back on the year that was and reflect on how to make the next year even better - and yes, you can do that with personal finance as well. So here’s a look back at everything Rogue Waves sent your way in 2019:
It’s the most wonderful time of the year. To only slightly paraphrase Andy Williams:
There’ll be parties for hosting Marshmallows for toasting And frightening kids don’t you know There’ll be scary ghost stories And tales of the gories of Halloweens long, long ago It’s the most wonderful time Yes the most wonderful time Oh the most wonderful time Of the year There’s nothing quite like the combination of that crisp chill of fall in the air, the sight of millions of leaves dying a fiery death (because of the colors, not because they’re in California), and the earthy scent as they start to decay and crunch underfoot for raising the spirits. Figuratively. But also perhaps literally. To pick up where we left off last month: Diversification, huh, what is it good for? Well, most people would say a lot, that diversification is the foundational bedrock of an investment portfolio. But also - and this next point might be somewhat controversial - nothing.
If you want to make money in the stock market - like, turn $1,000 into $100,000 money - you won’t do that with diversification. Well, you will, but it’ll take 50 years. The quickest way to make money is by making a very small number of very large, concentrated bets...and then hopefully the bets pay off. Think of any famous investor you’ve heard of, and they’ve probably made their money that way. The problem is, it’s a huge gamble. For every one investor you just named, there are hundreds that nobody has ever heard of, because they lost. And then there’s the ones that made it to the big leagues and subsequently crashed into bankruptcy: Long-Term Capital Management, Amaranth Advisors, Marin Capital, Tiger Management, MF Global...the list goes on. So sure, you can do all kinds of research/activism/questionably-legal market manipulating activities to try and make the gamble less of a gamble (*cough*hedge funds*cough*), but any investment with that kind of payoff comes with all sorts of risk. That risk is exactly why the SEC, in their paternalistic omniscience, have limited most of the best investment opportunities out there to “accredited investors”. For the vast majority of “non-accredited investors”, that level of risk is unacceptable. If your investments are in the form of a 401(k), or maybe you have a brokerage account but know you will be needing to use those funds in retirement, the possibility of losing all your money should never be on the table to begin with. Yes, turning $1,000 into $100,000 a couple times over would be nice, but we’ll choose instead to take the worst possible outcomes off the table and make money the old-fashioned way: savings and time. And so we turn to diversification. Diversifying will not make you money, but it will certainly mitigate potential losses. Back in the USA! And for our first meal in Atlanta after two months, we had...Chinese. Which was delicious, but our fortune cookie said - no joke - “Don’t invest in the stock market. Invest in family instead.” Well played, China. Apparently we have progressed to the psyops portion of the trade war. But let’s leave China to the side for the time being (until we get into what it means to have the world’s reserve currency) and stick with Europe for another month. Europe is a hot mess. Let’s start with Brexit. Boris Johnson is brilliant. Well, perhaps not. I mean, he kind of looks like he never outgrew his second year of boarding school where experimentation with sloppy hair and dress was all the rage, which admittedly taints our opinion. But he and/or his advisors (rumor has it Dominic Cummings is largely the brains behind the Brexit tactics) have played this beautifully.  Happy Labor Day! Our summer school valuation series has wrapped up, just in time for the kids to go back to actual school. So let’s talk for a second about actual school. Specifically, college...or not.
College costs have gone up by about 2.5-3% a year for the last couple decades. That’s not bad in and of itself, but that is still about 8 times more than wages have gone up in the same time period, which leads to a problem with affordability. Bonjour mis amis! Cette newsletter arrive du France, ou est cette auteur pour deux mois pour regard le clime economique et political de l’Europe...mais est comme ca truque de “Flight of the Conchords”. Parlez-vous Frances? Eh...no.  So fear not, that will be the end of the French. Language, anyway. The French themselves will be around for a while still. Despite themselves.
We managed to catch part of the Tour de France last week...and by “catch”, I mean there was a parade of...floats? But they weren’t really floats, they were decorated cars. One was a giant chicken. And they going at a solid 20mph, too, not your leisurely float pace. And people were harnessed in to the top/back/sides throwing knick-knacks at you as they whizzed by. After accumulating a big pile of free loot, you wait and wait and then watch some cars go by with about three times the value of the car in bikes on the roof rack, and then BAM! The riders fly by and are gone in about 10 seconds. There wasn’t even time to look for the different jersey colors, though in hindsight we got a good picture of Peter Sagan and whoever was king of the mountains in Stage 15. There’s probably a nice, drawn-out analogy there between cycling strategy and investing...teamwork, pacing, endurance, and so forth. But that’s not where we’re going with this. No. Instead, we are going to take you on our own little tour of France, and try and discern what makes the French so, well...French. If last month was Roger Moore as 007, then we’re closing out this summer series with Michael Bay. That’s right - it’s time for stock valuation, replete with explosions, special effects, and very confusing cuts in the action sequences.
Stocks, also referred to as “equity”, are shares of ownership in a company. These used to be issued as actual stock certificates (really decorative pieces of paper), but now it’s just digital 1’s and 0’s. Kind of like the cash in your bank account. When you buy a stock, you expect to make money in two ways. One is by collecting a dividend (which right now averages just under 2% for the S&P 500). The other is by the stock price going up. Unlike bonds, there is no intrinsic starting point for stock valuation. There is neither a maturity date nor a future value, which makes them more or less impossible to actually value. Not kidding - there are textbooks upon textbooks upon college courses upon certifications all trying to impart some standardization to stock valuation. But that uncertainty is also where the fireworks come in, and why stocks swing they way they do. It snowed two feet in Colorado on the first day of summer. That’s weird. Blame it on global warming. No seriously - CNN says the reason you had a snowstorm is because the atmosphere is “warmer and moister than before”, and then goes on to mention the 100-degree heat wave hitting Florida. First, slow down CNN. Second, a global warming could theoretically lead to colder temperatures. The sun’s rays hit the Earth directly between the Tropics of Capricorn and Cancer. That’s why they’re hot. The sun’s rays hit the poles very obliquely and get mostly reflected by the atmosphere. That’s why they’re cold. Circulation of that heat differential is largely due to ocean and atmospheric circulation patterns. Global warming could slow down those circulation patterns, which would reduce the ability of the planet to transfer heat to the extent it does currently, and would likely make the equator hotter than it is and northern/southern latitudes colder. Like in the Younger Dryas period or more recently the “Little Ice Age” in Renaissance Europe.
Anyway, Earth science tangent aside, the point is unintended consequences (especially when dealing with any sufficiently large, complex, and not fully understood system - like cough cough the economy cough), and how those unintended consequences just tend to make things weird. Too Soon to Start Investing? Financial Experts Weigh In. |
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